Ten years ago this week the first ever green bond was issued by the European Investment Bank (EIB) – with a goal of growing a new financial market that helped lower carbon emissions.
Since then green bonds have grown into a major source of capital. Earlier this week Gordon French, head of HSBC’s global banking and markets division in Asia-Pacific, talked to WiC about the market’s development and how China has become one of the biggest users of green bonds.
The first green bond was issued a decade ago. How has the market evolved, particularly in terms of dedicated investment funds?
The growth rate has been rapid. In the early days of the green bond market, annual issuance was around $1 billion but last year it was $90 billion. The evolution has been impressive – although it hasn’t been evenly spread in geographical terms. Europe was the most progressive region initially and it is only more recently that other regions have started to come to the party.
But the growth has been rapid and it has been strongest in the last three years. Indeed the pool of capital potentially available for green bonds grew some 25% between 2014 and 2016 alone, according to the Global Sustainable Investment Alliance. As of early last year, around $23 trillion of assets were professionally managed under responsible investment strategies, which is more than a quarter of all professionally-managed assets globally.
Is most of it related to clean energy? What are the other major sectors tapping green bonds?
Renewable energy was a natural focus at the start, but the market is broader now, with companies from a range of sectors issuing green bonds. These include real estate developers, infrastructure operators such as airports and subways, electronics manufacturers and financial institutions.
Clean energy will continue to be a mainstay of the market. If you look at China, which has signed up to the Paris Accord, it has an ambitious programme to change its energy mix and it is also promoting sustainable infrastructure development through the Belt and Road Initiative. You can see how committed it is to more environmentally sustainable growth and that is going to give real momentum to the green bond market over the years to come.
China was late to this area, issuing its first green bond in 2015. But now it is a major part of the market?
China has come from a slow start to accounting for a third of all green bond issuance last year. The major players have been the policy banks and the state-owned firms. So it has been a state-driven effort to start with, but that has been necessary to build momentum around what is a new concept.
What is developing next is more issuance from municipalities and local governments and other sectors, such as the auto industry. SOEs will naturally support policy initiatives, but I think we will see more private sector firms accessing the market too.
So there are supply drivers and I think they are going to meet with strong demand. There are more funds around the world buying green bonds and yields are fairly attractive in China. Foreign investors also have more access to Chinese bonds than ever before – thanks to the launch of Bond Connect this week, an investor in Milwaukee can buy a green bond issued in China.
There have been issuers in Hong Kong too. We have done green bonds with MTR and Link REIT, for instance.
France issued a heavily oversubscribed green bond earlier this year. Could a China sovereign be next?
China could certainly generate a lot of demand for a green bond if it chose to issue one. I think the French bond sent a good message about demand for this asset class – like the first sovereign green bond, which HSBC managed for Poland last year. Major deals like this help to broaden the market and make it more liquid. When large countries do this it creates some market excitement and can inspire more issuance from other borrowers in other sectors.
There will have to be more green issuance because the world has to use less fossil fuel. I read in a Week in China article that Qinghai province spent a week using only renewable energy and in doing so avoided burning 500,000 tonnes of coal. When you start to see examples like this – which even a year ago I don’t think we’d have seen – the momentum behind this market in China is clear.
Who defines what is a green bond?
There is no single voice that determines what a green bond is. International green bonds follow the Green Bond Principles, which were developed by investors, issuers and intermediaries with the International Capital Markets Association acting as secretariat. HSBC is on the committee for the Green Bond Principles. Global issuers would usually seek external opinions too. In domestic markets, we often see a greater role played by local governments in defining green bonds.
These are still early days for the market so there isn’t single definition. There isn’t a price advantage for issuers either, although there is some evidence that green bonds perform better over time. What is clear, though, is that issuing a green bond allows a company to demonstrate they are strategically prepared for the transition to a lower carbon economy. Over the long term, this could create an advantage over less well-prepared companies in terms of valuation and business prospects.
In China’s domestic bond market is there a national body that says what is green, like the NDRC?
Chinese regulators have been very active in encouraging the growth of the green bond market, with the central bank (PBoC) releasing its first guidelines in December 2015. These have been followed by other regulators (NDRC, MoF, CSRC, CBRC and CIRC) and the stock exchanges.
Bearing in mind what you said about Belt and Road, could China have a big impact in setting the green bond standards?
China is serious about developing more environmentally sustainable economies along the Belt and Road. So I’d predict that there will be a lot of green bond financing across the Belt and Road countries – and that Beijing will export its standards. So I would expect the Chinese to have more influence on the global green bond market as time goes by.
Your research team has published proposals for speeding the growth of the market. What are they and how will they help?
At HSBC we’d like to see a single measure for calculating the environmental impact of green bonds. We’d also like to see governments give greater incentives for green loans by banks, and for public authorities to pay for credit ratings or bond reviews of new issues to make it less expensive for new issuers.
How involved has HSBC been in China-related green bonds?
Very. We managed the first international green bond for a Chinese issuer with the Agricultural Bank of China deal in 2015.
We’ve also led deals including a $500 million bond for Bank of China’s London Branch, a $350 million deal for Modern Land and a Rmb3 billion onshore deal for the New Development Bank. The majority of Chinese green bond issuance has been in local currency but Chinese issuers are becoming a bigger part of the offshore market too.
China is going to build a new megacity Xiongan, largely from scratch. It seems likely to be planned on greener lines, so do you see green finance playing a big role?
It’s potentially a unique chance to build a city powered by green energy, encompassing everything from sustainable transport systems to energy efficient buildings, using all sorts of renewables and green technologies.
If you start with a clean piece of paper for a large piece of land, presumably with a big budget, it could be amazing what might be achieved with the latest technology. And you can see how green bonds could become an important part of the funding mix.
That could be a pretty massive issuer if, say, a ‘Xiongan Development Corp’ was set up to raise green bonds to finance the building the city?
Yes, it would be, given the scale of the project.
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